Vietnam Will Gain Big From The Sino-U.S. Trade War, Just Not Today

A woman works on a silk spinning machine at a factory in Dalat, Vietnam. (Photo: Godong/UIG via Getty Images)Getty

Truce or not, the Sino-U.S. trade dispute of 2018 is hobbling exports from China. U.S. tariffs levied this year cover $250 billion in Chinese goods, an obvious hit to factories that make products for America's consumers. Adding pressure on China is its cheaper southern neighbor Vietnam, which was already siphoning away potential investment, and analysts in Ho Chi Minh City say even more multinationals are scoping out the Southeast Asian country now so they can export their goods without paying the tariffs.

They're not moving just yet, however. Vietnam's foreign direct investment for the year so far is actually down in comparison to 2017. So what's up?

The Vietnamese government makes it relatively easy to set up a plant, labor costs are lower than in China and the country is on a roll signing free-trade deals. But many multinationals are still searching for suitable sites and equipment, while also hoping to keep Chinese consumers in the loop.

“They’ve got to find the space in the industrial parks, they’ve got to build factories if they’re not there already and they’ve got to import machinery," says Kevin Snowball, chief executive officer with PXP Vietnam Asset Management in Ho Chi Minh City. "But there definitely seems to be a feeling that Vietnam is the No. 1 alternative destination.”

Who’s Exploring Vietnam

Foxconn Technology, the world’s largest contract assembler of consumer electronics including iPhones, may test Vietnam’s appeal. The Taiwanese firm, which already operates a sprawl of mega-factories in China, is in talks with the Hanoi People’s Committee about setting up an iPhone plant to reduce the impact of the trade war, according to a report by the Vietnam Investment Review.

It’s not that that Vietnam lacks advantages. Vietnam’s trade surplus with the U.S. comes to $35.8 billion on exports of $46.5 billion, but Washington isn’t accusing it of getting there unfairly. U.S. Vice President Mike Pence even told leaders of 21 Asia-Pacific countries including Vietnam last month that the U.S. would seek trade deals on "the principles of fair and reciprocal trade."

More on Forbes: Vietnam: FDI explosion and trade wars

The country, which is determined to grow after decades of poverty and war, has already been attracting investment from overseas by keeping labor costs as low as 2.7 million dong ($115.6) per month in the private sector and relaxing rules for foreign business. It’s ideally located for eastbound marine shipping and a land border shared with China provides access to the country's ranks of consumers. The overall economy has warmed since Vietnam quelled macro-economic issues that came up after the global financial crisis. Now the country is working toward finalizing a free trade pact with the European Union and clinching another with 10 Pacific Rim countries.

Vietnam is developing now a policy to draw in more high-tech firms to follow earlier investments by Samsung, says Rajiv Biswas, Asia Pacific chief economist with IHS Markit in Singapore. “As a result, you’ve seen this very rapid expansion in Vietnamese exports of electronics,” he says.

More Than Just Plans?

Foreign direct investment actually disbursed in Vietnam last month totaled $1.4 billion, down from $1.8 billion in the same month a year earlier. Registered investments over the first 11 months of 2018 reached $23.18 billion, down 16% year on year. Expect a "conservative" 2019, too, says Fiachra MacCana, research head at brokerage Ho Chi Minh City Securities.

Many investors have been delayed by the mechanics of setting up a factory in Vietnam, analysts on the ground say. The process of obtaining the required permits can take up to a year, while labor and land may also be difficult to find for some types of production.

To be sure, the companies that also sell their wares to Chinese consumers will still be looking to maintain their access to such a conspicuously large market, according to this analysis by business consultancy Dezan Shira & Associates.

Meanwhile, U.S. trade officials have already accused Chinese steel producers of transhipping their exports of the metal through Southeast Asian markets like Vietnam just to avoid tariffs. To avoid accusation of routing their goods through another country simply to disguise their origin, some companies are leaning toward making goods in both places, says Maxfield Brown, a senior associate at the consultancy.

“What we’re seeing on the micro level and in the media everywhere telling us is that is there’s an enormous shift,” MacCana says. But because shifting production takes time, he says, “no one has pulled the trigger quite yet.”